The UK housing market – the affordability challenge
17 January 2017
It is widely accepted that there is a significant demand / supply imbalance in the UK housing market, with strong demand for home ownership but low build rates by historical standards. By some estimates, we are currently building around 60% of the houses required in the UK each year. Lack of supply has been a key factor in driving up prices and negatively impacting affordability. But just how much of an issue is affordability?
While housing affordability has become more of a challenge in recent years, it is still essentially good for most of the country. Only in London and the South East are house price to earnings multiples now significantly above the levels seen in 2007 pre-recession. However, despite strong growth in house prices, low interest rates have acted to keep payments generally affordable as a proportion of household income. While this should benefit current homeowners, first time buyers are increasingly likely to be constrained by high deposit requirements. The average deposit required by first time buyers in the UK is now £49,000, equivalent to the average annual income of the household. This presents a significant hurdle for anyone looking to get on the housing ladder.
The Government has recently announced various housing initiatives including a £2.3bn housing infrastructure fund and £1.4bn to deliver 40,000 additional affordable homes (c.£35,000 per new home). This should help to promote some growth within the sector, although falls some way short of the more fundamental changes required to bring supply of housing in line with demand.
These latest funding announcements should also be viewed in the context of other schemes such as Help to Buy, which has provided crucial funding, particularly for first time buyers struggling with high deposit requirements and tightening mortgage lending. c.100,000 properties have been bought with an equity loan since the launch of the scheme in April 2013, with over c.20% of new build transactions depending on it in 2015. This equates to c.£4.6bn of funding since 2012, or c.£46,000 per property. The Help to Buy equity loan is due to be withdrawn in 2021 which could leave a significant gap in the market unless replacement funding can be found.
In addition to this potential funding gap, the Government faces a number of other questions around its use of Help to Buy. Equity loans only being available for new build properties limits the impact of the scheme across the broader housing market, and potentially disadvantages house buyers who either want to live in an older property or live in a region with less availability of new build homes. The impressive growth in house prices in recent years is also likely to have generated significant equity gains for the Government. While unlocking this may prove challenging, we wonder whether there may be an opportunity to use this to further cross-subsidise additional social and affordable housing.
Interest rates create a more fundamental problem. While low rates have helped to sustain affordability for current homeowners, any rate rise could present significant affordability problems, with an associated impact on disposable income and consumer spend. With economic growth already fragile, this is a result the Government would certainly want to avoid.
All of this presents a distinctly uncertain picture for the UK housing sector. While the underlying strong demand for home ownership creates a positive driver in the longer term, affordability and its associated challenges may present significant challenges over the next few years.